In his last address at the Association of Mutual Funds of India’s (Amfi- the Indian mutual fund industry’s trade body) annual general meeting held in Mumbai on Monday as the chairman of the capital market regulator, Securities of Exchange Board of India (Sebi) chief U.K. Sinha nudged the mutual funds industry to advertise direct plans.

According to chief executive officers of three fund houses, who were present at the meeting, confirmed to Mint that Sinha wondered why mutual funds were not talking more about direct plans to their investors. “He said that he was aware that the reason behind our silence was that we were held ‘hostage’ by a section of large distributors," said one of the CEOs, on the condition of anonymity.

Effective 1 January 2013, all asset management companies (AMCs) launched direct plans for all their open-ended schemes, a move which was made mandatory by Sebi through a circular it had issued a few months earlier. Direct plans are bought by investors if they wish to bypass the distributor. Since distributor commissions are not embedded in direct plans, their net asset values are higher.

Although a sizeable chunk of institutional investors has shifted to direct plans, the progress of direct plans in equity has been slow and steady. As per Prime Database, assets under management of direct plans in the equity funds’ segment (including balanced funds) were 14% by the end of 2014. This grew to 15% by the end of 2015 and to 18% by the end of June 2016. “We cannot really advertise about direct plans as that will offend certain large distributors as they feel we would be poaching on their clients by approaching them directly," said the second CEO, on the condition of anonymity.

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He said that Sinha seemed to be mindful of this and that’s why indicated that the industry collectively should start talking about direct plans. “Direct plans should be spoken about at an industry level," Sinha is believed to have said at the AGM. “Perhaps he was indicating that with Amfi now getting half of the investor education fund, perhaps Amfi should start campaigns on direct plans," said the first CEO. Of the two basis points of the overall expense ratio that each fund house collects towards investor education fund—another Sebi requirement—it is mandated to transfer half of that collection to Amfi, which also runs its own investor awareness campaigns, at an industry level.

At the same time, Sinha is said to have reiterated that just because he was advocating to fund houses to start advertising direct plans, he was not “anti-distributor". “If I was anti-distributor, then why would I have allowed extra incentive to mobilise collections for Beyond Top 15 towns and the transaction fee that distributors can collect?" Sinha said, according to the three CEOs.

Sinha is also believed to have said that “India is a big country and that the mutual funds industry and distributors would have to appreciate that there are all sorts of investors in the market. That includes distributors as well as those investors who would want to buy direct plans. He blamed certain section of the media about “spreading the myth that Sebi is anti-distributor. Sebi is not".

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